Month: December 2009

For Whom Do They Work?

“You might think that board members overseeing businesses that cratered in the credit crisis would be disqualified from serving as directors at other public companies,” writes Gretchen Morgenson in last Thursday’s New York Times.  (See, “What Iceberg? Just Glide to the Next Boardroom.”)

She has a point.  Board members have a legal and moral responsibility to serve the interests of shareholders, those who actually own the companies they serve.  Their duty is to ensure that their companies are run soundly and profitably.  But recent experience suggests that there is, in fact, little if any accountability.

She quotes Paul Hodgson, senior research associate at the Corporate Library, a corporate governance research firm:  “None of these directors have stood up and said, ‘We made a mistake here by not calling management to account.’”  He adds, “They have certainly avoided the limelight as far as blame is concerned.  Moreover, they continue to get work as directors at other companies.”

One reason for this is that it the rules governing the selection and retention of board members are stacked in their favor.  It takes a massive effort to challenge an official slate of board members.  And there seems to be no interest within boards themselves to establish accountability – for several reasons.

It is generally in their interest to go along with management and continue receiving the perks they enjoy.  Morgenson offers an amusing quote from Frederick E. Rowe, president of Investors for Director Accountability: “Here’s a conversation you’ll never hear: ‘Yes, I get paid $475,000 a year. I play golf with the C.E.O.; he’s a personal friend. I go to interesting places for board meetings, I am around interesting people, and I would never say one word that would jeopardize my position on the board.’”

But there is a group culture as well that instills conformity.  Board members are often drawn from similar backgrounds and maintain outside relationships with each other through other corporate boards as well as country clubs, charities, and national associations.  Collectively they form a kind of national community, with strong common interests and identities, a point that was established by Michael Useem’s research at Wharton 25 years ago.

Moreover, it is easy for “groupthink” to flourish among board members. Usually small in size, operating in secrecy, they receive limited information, and are prone to maintaining cohesiveness and preserving their established business identities along with their self-esteem. They want to support the CEO they selected as long as they can.  As a result, they will often collude in ignoring disturbing information, in accepting excuses, stifling criticism.  Certainly, they have little motivation to blame each other – or themselves.

John Gillespie, co-author with David Zweig, of “Money for Nothing,” a forthcoming book on board failures, notes that the culture of boards “doesn’t allow directors to do an effective job even if they wanted to.”

They are intelligent, experienced and accomplished people so there can be little doubt that they know about their responsibilities as board members, even if they don’t always know they know it.  In this case, they don’t seem to want to know about their failure to ask tough questions and provide strict oversight.

As we are thinking about reforming the financial industry, is there anyway to get them to take their jobs more seriously?

What is Happening To Us? And Why?

The health care debates have revealed bitter political divisions, but the signs of polarization, both big and small, litter our entire political landscape.  Why is this happening?

Ross K. Baker, a professor at Rutgers University and an expert on the history of the Senate, noted in The New York Times: “It has gotten so bad now that Republicans don’t want to be seen publicly in the presence of Democrats or have a Democrat profess friendship for them or vice versa.” (See, “In Senate Health Care Vote, New Partisan Vitriol.”)

Even the careers of Supreme Court clerks reveal this polarization.  “Until about 1990 . . . there was no particular correlation between a justice’s ideological leanings and what his or her clerks did with their lives.”  But now, “Clerks from conservative chambers are now less likely to teach. If they do, they are more likely to join the faculties of conservative and religious law schools. Republican administrations are now much more likely to hire clerks from conservative chambers, and Democratic administrations from liberal ones.” (See, The New York Times, “In Supreme Court Clerk’s Careers, Signs of Polarization.”)

The evidence is everywhere, but why is this happening ?  And why now?

Two reasons, I think.  The first has to do with the psychology of politics in a post cold war era, the other with emergent real differences in society.

Following the collapse of communism, we no longer have a common enemy to unite against.  All the frustrations and petty annoyances that tend to get displaced onto politics now cannot be exported so easily into hatred of the Evil Empire.  They are being forced into our local arenas.  As in spectator sports that have always provided outlets for the passions and disappointments in the daily lives of fans, we are lining up in opposing political camps.  That not only provides more opportunities to vent our frustrations, but also, given the lack of a common danger, we have less incentive to moderate and soften our conflicts with each other.

Here is where real, underlying social issues come into play, the second reason for our increasing polarization.  The gap between the rich and the poor has been growing.  This is reflected in one way by the growing disparity between workers salaries and the lavish compensation packages of top executives, but more generally in the increasing erosion and fragmentation of the middle class.  As a result, two increasingly distinct and identifiable interest groups are emerging.

This is not simply the rich versus the poor, of course, those who have and those who don’t.  If that were so, the rich would not stand much of chance.  It is a matter of identification and aspiration, those who do not want their opportunities diluted by taxes to provide social safety nets for the poor, those who emphasize the importance of sacrifice and discipline in getting ahead, who are convinced they will succeed and are motivated by the achievements of others, the stories of hyper-successful geeks and those who have worked their way up the ranks.

On the other hand, there are those at the margins of our national prosperity who tend to be left out, those sinking in status, and those troubled by our unequal access to security and protection against suffering.  Many also don’t like the picture that is emerging and want a more equal society, but they, too, increasingly have no choice but to side with the underdogs.

There are plenty of exceptions, but we are gradually separating out into two teams, each with their diverse complement of fans.  And they are engaged in a desperate battle to claim the future.

Can We Redraw a Distinction?

It is easy to get confused about banks.  It’s not just that one word is being applied to a huge range of organizations, but legal distinctions have been abolished or blurred as well, adding to the confusion.

I am sure many, like me, remember neighborhood banks.  In the days before “relationship managers” we may even have known people who worked in one.  On the other hand, the names of the big investment banks J.P.  Morgan and Lehman Brothers were also familiar, though from a different world.  Congress firmed up the distinction in the wake of the financial collapse of 1929-1931, providing deposit insurance for customers of local banks after a disastrous rash of bank failures in which many lost their savings.

Financial deregulation in the 1990’s abolished the firewall between the two, and then in last year’s “great panic,” the Fed allowed the giant investment banks to become like the others, so they could gain access to federal credit.   Now they are all the same – except, of course, they’re not.

Robert Wilmers, Chairman and CEO of M&T bank, reminded us recently in The Wall Street Journal of the distinction:  “five firms have swung from an aggregate loss of $14.0 billion in 2008 to $30.1 billion of net income through September 2009. The remainder of the industry, which earned $4.4 billion in 2008, is now showing $9.7 billion in red ink through this year’s third quarter.”  This is the difference between banks that focus primarily on trading and those that “serve the public,” as Wilmers put it.

He added: “These large institutions operate in a different world than that of traditional, community-oriented banks,” and suggested Congress “should consider requiring that financial institutions account separately for their trading and their traditional banking businesses, so the public can see what’s going on.”   (See, “Not All Banks Aree Created Alike.”)

We probably can’t put humpty-dumpty back together again, but it is not just a matter of guarding against a banking system that is bloated and out of control.  It is also about restoring some common sense distinctions in the mind of the public.  We make sense of the world through the categories we use, and the category of “bank” has lost much of the meaning it had.  As things stand, we will continue to be suspicious and bewildered by the banking brands that compete for our attention and trust.

It’s not that our “community-oriented banks” have been blameless, by any means.  They were pushing sub-prime mortgages like everyone else, and extending home equity loans without adequate regard for the ability of lenders to pay.  But at least we stood the chance of understanding how they worked.

What Will They Learn?

Will consumers become cautious and restrained in response to this recession, as marketing experts fear?  Friday’s Wall Street Journal noted: “many companies now anticipate a shift in consumer behavior that persists even after jobs and growth get back closer to normal.”

The Journal quoted Jim Taylor, vice chairman of market research for the Harrison Group: “We seem to be at a cultural inflection point that we haven’t seen since World War II . . . .  People are getting used to being careful, and I don’t know how you undo that.” (See, “Spendthrift to Penny Pincher: A Vision of the New Consumer.”)

Time, of course, is what usually undoes that.  Old assumptions resume their sway in the mind, while established patterns of behavior reemerge from temporary adjustments. Personality is slow to change significantly.  Culture even slower.  There is no particular reason to think it will be very different now.

No doubt the continuing threat of unemployment has a very significant impact on consumers’ willingness to over extend themselves.  As they see friends and neighbors struggling to stay above water, that makes them cautious and anxious.  And since banks, protecting themselves, seem only willing to risk money in the search for their own investment profits, it’s not easy for consumers to borrow or small businesses to extend credit to their customers.

But, by and large, its fair to assume that consumers are waiting to resume the life they knew, to “get back closer to normal.”  But what is “normal”?

In my last post I quoted Newsweek’s prediction that unemployment will stay “as much as 7 or 8 percent even into 2014,” adding George Soros’s comment:  “The average American will not be better off in five years.”  Three out of seven have had their pay cut in last year. (See, December 17, “Economic Man – Unemployed”)  That will crimp the style of many consumers.

So there is likely to be a significant wait until “normal” resumes.  The question I think that market researchers are really asking is will the credit mania resume?  Will consumers be willing to borrow once borrowing becomes an option again?  Will they take out mortgages and home equity loans once they become available? Will they go as deeply into debt as before?  Most likely that will depend on what all other consumers do.

The real question is will cheap money become available again?  Will the government encourage home ownership?  Will the Fed keep interest rates low?  Will banks compete to underwrite the consumer?  I imagine that Mr. Taylor hopes so, as do others in marketing and sales.  They are eager to restart the engine of consumption.

Much as we need robust consumption to fuel the economy, would that be smart?  Or will we begin another cycle, another boom that will end in another bust?

A Hidden Epidemic of Emotional Problems

Economists like to think about the average U.S. citizen who studies the market, has 2.3 children, earns $28,000, and is married 1.9 times.  A recent poll by The New York Times adds some statistics to this construct in an age of unemployment. (See, “Poll Reveals the Trauma of Joblessness.”)

“More than half of the nation’s unemployed workers have borrowed money from friends or relatives since losing their jobs. An equal number have cut back on doctor visits or medical treatments because they are out of work. A quarter of those polled said they had either lost their home or been threatened with foreclosure or eviction.”

The poll also put some flesh and blood — and emotional consequences – to these facts, exploring the psychological impact of unemployment. “Almost half said they had more conflicts or arguments with family members and friends; 55 percent have suffered from insomnia. Almost half have suffered from depression or anxiety.  Forty percent of parents have noticed behavioral changes in their children that they attribute to their difficulties in finding work.”

One mother reported: “Every time I think about money, I shut down because there is none . . . . I get major panic attacks. I just don’t know what we’re going to do.”

Nearly half of the adults surveyed admitted to feeling embarrassed or ashamed as a result of being out of work. Not surprisingly, given men’s traditional roll of breadwinner, they were significantly more likely than women to report feeling ashamed most of the time.

Nearly half of those polled said they felt in danger of falling out of their social class, with those out of work six months or more feeling especially vulnerable. Working-class respondents felt at risk in the greatest numbers. (See my December 12^th posting, “Middle Class America?”)

Those still employed have not escaped the toll. “According to a New York Times/CBS News nationwide poll conducted at the same time as the poll of unemployed adults, about 3 in 10 people said that in the past year, as a result of bad economic conditions, their pay had been cut.”

What we don’t know we know about unemployment are the emotional costs hidden behind the statistics.  The anxiety, depression, anger, shame and dread that afflicts those who have lost their jobs, or even a significant portion of their income.

And as it seems unlikely that the picture will change significantly for a long time.  Newsweek predicted this week that “U.S. unemployment is likely to remain high for years to come, as much as 7 or 8 percent even into 2014.” And it cited George Soros:  “The average American will not be better off in five years—unemployment will remain high and wage growth will continue to be flat.”  (See, “Joblessness is Here to Stay.”)

We are likely to have statistics on that, however imperfectly they reflect the true facts.  But we are seriously at risk of neglecting the epidemic of mental health problems that will accompany those facts.